Thursday, February 02, 2017

High prices hurt. Why Sinodinos is under pressure over books

Strong governments stand up for little people.

In working-class Brisbane in the early 1970s, no one stood up for the Chesters.

"Working parents, three kids. My mother had been squirrelling away money for two years to afford a return flight to Perth to visit her mother," daughter Karen told a conference late last year.

"The price of domestic air travel at the time was in real terms over fourfold what it is today. The price of clothing, with tariffs north of 40 per cent – think President Trump – was also more than threefold higher in real terms than today. And three kids, each five years apart in age, experienced a simultaneous exponential growth spurt."

"A perfect storm for my mother, who ended up raiding the squirrel tin to re-clothe us. No flight to Perth. She never saw her mother again."

By the early 80s, Chester was studying economics at the University of Queensland. She'd wanted to get into law, but didn't get the marks. One day in the second semester, during microeconomics, what had happened to her family began to become clear. Punitive tariffs on clothes and the two-airline policy had prevented her mother getting to Perth.

Four years further on, hired as an economics graduate at the Department of Prime Minister and Cabinet, a 20-something Chester was sitting in prime minister Bob Hawke's office taking notes.

He asked the assembled officials to tell him why he should cut tariffs.

"Because tariffs screw workers," Chester mumbled, in a voice she had hoped was too quiet to be heard.

But it was heard. Hawke asked the officials to explain how, asked for modelling on exactly how much they hurt workers, and started to drive tariffs down.

Twenty years on, after some years away in the private sector, Chester found herself back in government chairing a Productivity Commission inquiry into (among other things) the price of books.

So-called parallel import restrictions make it illegal for booksellers to import from wholesalers, except in limited circumstances. Forced to go through Australian publishers, even for the big name foreign books by authors such as JK Rowling or Elena Ferrante, the bookshops can be hit up for more and made to charge their customers more.

Except that the Booksellers Association and the Publishers Association told Chester it didn't happen. The booksellers prepared a chart of the price of 75 books in Australia, the US and the United Kingdom and argued there was little difference. The publishers compared 200 titles and said most were cheaper in Australia.

But Chester noticed that the samples were limited, in odd ways. And the booksellers' list compared the price of Australian paperbacks to foreign hardbacks, even where Australian hardbacks were available and more expensive.

She commissioned her own higher-quality survey of the price of 1000 identically matched books from the top 5000 titles sold in Australia and the UK and found the pre-tax Australian prices exceeded the prices charged in the UK by a staggering 20 per cent.

Worse still, limiting her comparison to just the majority of books that were more expensive in Australia (which is what's relevant for examining the effect of trade restrictions) she found the average difference was 30 per cent.

Despite their protestations, the Australian publishers seemed fully aware that they charged more for overseas books than was charged overseas, because they argued before her that they used those profits to subsidise the production of Australian books. But when she asked them for details about the cross-subsidy none returned with an answer, although several promised to.

It's the same argument that was used by Australian record labels right up until 1998, when John Howard (with Arthur Sinodinos as his chief of staff) extended Hawke's program of trade liberalisation by allowing the free import of compact discs. It was going to kill Australian music.

Two decades on, it's an easy claim to assess. Back in 1998 the Triple J Hottest 100 contained 42 Australian recordings, an all-time record. By this Australia Day it contained 66. The industry tally of all genres finds that back in 1998 Australian recordings accounted for 1 in every 5 recordings bought here. After two decades of open trade, it's 1 in every 3.

Sinodinos is now industry minister, and says he is as committed now as he was then to blasting away rules that hurt consumers. "Protection stops you being lean, it leads to companies padding themselves out," he told Fairfax Media this week. He has before him Chester's report, and he wants responses within a fortnight.

The Harper competition review has already recommended removing the remaining import restrictions on books, as has the Competition and Consumer Commission, the old Prices Surveillance Authority and a Senate inquiry. The government accepted Harper's recommendation and asked Chester's inquiry how to do it. She's recommended an immediate end in December this year, with no phase out.

Labor, shamefully, is backing continued high prices as it did for compact discs two decades ago. This time it wants to "support Australian stories".

Chester wants to support Australian consumers. She says there's $15 million to $25 million in it on just the 1000 titles she examined, depending on freight costs. Sinodinos will have to decide whether to back us.

In The Age and Sydney Morning Herald